Dipping into US Strategic Oil Reserves: A Speculator's Bonanza

The White House is keeping the rumor-mill afloat with hints that it may draw from US strategic oil and petroleum reserves, watching the market respond on the speculation with a slight fall in oil prices, but this is just a testing of the waters.

America has a 696-million barrel Strategic Petroleum Reserve stored away in underground salt caverns in two US states, Texas and Louisiana, in the event of an energy supply emergency. It may sound like a lot, but when you consider that the US imports over 300 million barrels of oil and petroleum products monthly, the buried reserves are meager.

So when mainstream media starts reporting about “anonymous White House sources” hinting that President Obama is considering releasing oil from the reserve, you have to wonder why. Most likely, they are just testing the potential public response to this.

Oil prices have risen to around $120 per barrel in the past weeks, after seeing a drop to around $90 per barrel in July. Earlier this year, before oil prices hit the July low, the White House was also considering dipping into the country’s reserves, but the July drop made this unnecessary.

Clearly nothing has been decided yet. Gas prices are also up around the 3 September Labor Day holidays in the US, and all eyes will be on the post-Labor Day fluctuations. Meanwhile, the White House is ensuring that the “rumor” is alive but careful not to give any suggestions as to how much strategic reserves would be released in this eventuality.

Tapping into US strategic reserves requires support from nations belonging to the International Energy Agency (IEA). When the US was considering the same earlier this year, Western countries like the UK, Germany and France were supportive, citing concerns about the impact of high oil prices on the global economy and also about Iran, for which high oil prices somewhat eases sanctions.

It is still not clear whether IEA countries would support a US release of strategic reserves now. The situation is not perhaps as dire as it was earlier this year.

At this time last year, the IEA and the US jointly tapped into strategic reserves to bring down oil prices as a result of the conflict in Libya, among other things. They drew some 60 billion barrels in strategic reserves altogether.

What happened to gas prices during the 2011 strategic reserve drawdown? Well, not much, the pumps barely had time to respond. While oil prices fell by some $7 per barrel, they had already rebounded within a week. The only benefit was to the speculators.

Would it lower gas prices ahead of the November 6 presidential vote? Even the rumor that the US might draw down on strategic reserves could help lower the price of gas at the pumps, however temporarily. On Friday, 24 August, the price of oil dropped to $95 per barrel on the rumor.

Republicans are all over this, of course, perceiving it as an obvious political move ahead of elections, and not in the country’s interest.

Tapping into strategic reserves would, as it did last year, result in only a very temporary reduction in gas prices. So if the point is to lower gas prices ahead of elections, it’s too early: prices would rebound before the crucial vote.

The average American consumer is unlikely to benefit much from such a move, but it will indeed be a speculator’s bonanza.